Deduction for interest on surplus business funds upheld for a co-operative credit society's bank deposits

Interest earned by a co-operative credit society on fixed deposits and other bank investments made from surplus business funds can qualify as income attributable to the business of providing credit facilities to members under section 80P(2)(a)(i), rather than being assessed as income from other sources under section 56. The Tribunal followed its coordinate-bench rulings and the Karnataka High Court's view in Tumkur Merchants Souharda Credit Cooperative Ltd., distinguishing Totgar's Cooperative Sale Society Ltd. on the basis that the deposits here arose from operational funds not immediately required for lending. The disallowance was therefore deleted.

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Issues: Whether interest earned by a co-operative credit society from fixed deposits and other investments with non-co-operative banks is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, or is assessable as income from other sources under section 56.

Analysis: The assessee was a co-operative society engaged in providing credit facilities to its members. The interest in question arose from deployment of surplus operational funds in bank deposits. The Tribunal noted that the issue was covered by its own coordinate-bench decisions and by the Karnataka High Court decision in Tumkur Merchants Souharda Credit Cooperative Ltd., which distinguished Totgar's Cooperative Sale Society Ltd. on the ground that Totgar's concerned surplus sale proceeds retained as a liability, whereas here the deposits were made from business funds not immediately required for lending. Where two views existed, the view favourable to the assessee was followed.

Conclusion: The interest income was held to be eligible for deduction under section 80P(2)(a)(i) and not taxable under section 56. The disallowance made by the Assessing Officer and sustained by the CIT(A) was set aside.

Ratio Decidendi: Interest earned by a co-operative credit society on deployment of its business funds in bank deposits is income attributable to its activity of providing credit facilities to members and qualifies for deduction under section 80P(2)(a)(i), unless the receipt is shown to arise from surplus liabilities of a different business activity.

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